Nasdaq Surges Alongside The Dollar; 10Y Yield Slides Ahead Of GDP

In the aftermath of blockbuster earnings from Amazon, which is set to open at an all time high as it breathes down Apple's neck for the title of first $1 trillion market cap company, and Intel, it is hardly a surprise that Nasdaq futures are pointing sharply higher (especially with Gartman shorting the Nasdaq yesterday).

What is more surprising is the broader weakness elsewhere, with Dow futures down 90 points and even the S&P in the red, as Asian shares rose and European equities were little changed. Traders are cautious ahead of today's Q1 GDP print, which is expected to slide from 2.9% to 2.0%, especially in the aftermath of the terrible UK GDP print earlier, which sent cable, gilt yields and May rate hike odds tumbling.

Major European stock gauges were mixed, with the Stoxx 600 index little changed, and heading for its longest streak of consecutive weekly gains since October 2017. Amundi, Europe’s biggest asset manager, climbed after reporting record 1Q inflows, while Electrolux slumped after raising its projection for raw material costs in 2018. German and British benchmarks outperforming as the pound and euro fell after the U.K.’s worst growth figures since 2012, while data out of France and Spain also disappointed. Meanwhile, investors continued to pull money out of European equity funds in the week through Wednesday, according to a BofAML, citing EPFR Global data

Asia equity markets traded mostly higher as the region got an uplift from the momentum in US where all majors extended on gains amid tech outperformance after strong Facebook results, which was later followed after-market by Amazon, Intel, Microsoft and Western Digital which all beat on earnings forecasts. As such, ASX 200 (+0.2%) and Nikkei 225 (+0.5%) traded positive although gains were relatively mild as participants also digested a flurry of data releases and earnings, while KOSPI (+0.6%) benefited from a warming of ties amid the historic inter-Korean summit. Elsewhere, Shanghai Comp. (-0.7%) and Hang Seng (+0.2%) were mixed with underperformance in the mainland following a neutral position by the PBoC in today’s open market operations, while data also showed a slowdown in the pace of Chinese Industrial Profit growth.

The most notable move overnight was, again, the dollar, as there seems to be no stopping the greenback even as Treasuries edge higher a second day, with the yield sliding below 2.97% and ever further from the 3.00% level which was crossed for the first time since 2014 just two days ago.

Meanwhile, the ominous, pre-recessionary flattening has resumed, and the 2s10s is back under 50bps this morning.

The Bloomberg Dollar Spot Index advances for the eighth day in nine amid an accelerating short squeeze, which we warned about a week ago...

... hitting a fresh three-month high as investors scale back expectations that central banks other than the Fed are confident in tightening. In fact, the dollar is headed for its best week since December 2016.

Elsewhere in FX, as noted above, U.K. GDP data misses estimates, slashing the odds of a BOE hike next month, making the pound the worst G-10 performer. The euro slid amid disappointing data out of France, while the won climbed with Korean leaders’ summit in focus; The yen was near the bottom of a five-week spiral on concerns its yield differentials against the dollar would widen further after the Bank of Japan signaled it’s in no hurry to exit.

Overnight the BoJ concluded its latest policy meeting and kept monetary policy unchanged as expected with NIRP held at -0.10% and the 10yr JGB yield target at around 0%. The decision was made by 8-1 vote with Kataoka the dissenter again, but the biggest surprise was that the central bank removed its reference to achieving 2% CPI target around FY19. Furthermore, BoJ stated that risks to economy were balanced for FY2018 but are skewed to downside for FY2019. BoJ Governor Kuroda said it is appropriate to continue powerful monetary easing, and said that the timeframe for a price target was a limit implying immediate policy change, adds was just a forecast, not a limit and inflation momentum to continue faster to the 2% target.

Meanwhile, the ECB’s Survey of Professional Forecasters maintains 2018 inflation at 1.5%, cuts 2019 inflation to 1.6% to 1.7%. ECB's Mersch said the path of normalization remains conditional on outlook for price stability, adds underlying strength of Euro area economy continues to support their confidence that inflation will converge to their aim.

SNB’s Jordan says there has been a reduction in significant overvaluation of CHF however the currency remains overvalued; he adds negative interest rates and market intervention remain essential as situation is still fragile.

North Korean leader Kim Jong Un and South Korean President Moon Jae-in agreed Friday to finally end a seven-decade war this year, and pursue the “complete denuclearization” of the Korean Peninsula

Economic growth in France, the euro-area’s second largest economy, cooled sharply in the first quarter, and while weather was a factor, the slowdown may heighten concerns about the broader outlook for the euro area. Data weighed on the euro, which fell for the third day reaching its lowest since mid- January vs the dollar

The Bank of Japan left its stimulus program unchanged on Friday, while removing language from its statement declaring that it would reach 2 percent inflation around fiscal 2019. The decision to maintain the yield-curve control program and asset purchases was forecast by all analysts surveyed by Bloomberg

Whipped by a global stock selloff and climbing bond yields, Norway’s $1 trillion wealth fund reported its first loss in two years in the first quarter. The sovereign wealth fund lost 171 billion kroner ($21 billion), or 1.5 percent, the investor said on Friday

Profit growth at Chinese industrial firms posted a sharp deceleration in March, as factory inflation moderated. Industrial profits rose 3.1 percent last month from a year earlier, the slowest gain since 2016

Asia equity markets traded mostly higher as the region got an uplift from the momentum in US where all majors extended on gains amid tech outperformance after strong Facebook results, which was later followed after-market by Amazon, Intel, Microsoft and Western Digital which all beat on earnings forecasts. As such, ASX 200 (+0.2%) and Nikkei 225 (+0.5%) traded positive although gains were relatively mild as participants also digested a flurry of data releases and earnings, while KOSPI (+0.6%) benefited from a warming of ties amid the historic inter-Korean summit. Elsewhere, Shanghai Comp. (-0.7%) and Hang Seng (+0.2%) were mixed with underperformance in the mainland following a neutral position by the PBoC in today’s open market operations, while data also showed a slowdown in the pace of Chinese Industrial Profit growth. Finally, 10yr JGBs were marginally higher with prices underpinned at the open to track the upside in USTs and with gains then held throughout the session including after an uneventful BoJ announcement in which it kept policy unchanged but removed the wording on reaching inflation goal around FY19.

Top Asian News

BOJ Maintains Stimulus While Removing Language on Timing of 2%

Sony’s New CEO Sets Conservative Targets as He Seeks Revival

Malaysia’s Prime Minister Says Markets to Decide on Currency

Tencent-Backed Little Red Book Is Said to Seek $200 Million

Hedge Fund Judah Value Jumped 46% This Year on Agritrade

European stocks also pushed higher (Stoxx 600 +0.1%) post Thursday earnings as tech outperformance buoyed general sentiment, alongside an easing of geopolitical tensions following constructive dialog between Korea’s leaders. FTSE saw significant strengthening following uninspiring GDP data, that weakened the GBP and further reduced the possibility of tighter monetary policy. While expectations were focused on bad weather having a significant adverse impact, this was quoted to have had only a “limited effect” which pushed expectations of a rate hike in May to sub 25% from 50-50 prior.

Top European News

Draghi’s ‘Moderation’ Rears Its Head in French Slowdown; Betting on Lower Euro-Area Rates Seen as the Way to Go for Now

Norway’s $1 Trillion Wealth Fund Posts First Loss in Two Years

Romanian President Calls for Premier’s Resignation

German Unemployment Falls as Companies Overcome Soft Patch

In currencies, the DXY index is gathering momentum, largely at the expense of the Greenback’s currency counterparts in the basket (and beyond), and has now cleared a few more chart resistance levels, around 91.526 and from 90.702-751, with the latter entering a multi-month channel that targets 91.996 ahead of 92.000 for more obvious psychological rather than technical reasons. DXY high so far is around 91.825, and another supportive factor comes from month-end rebalancing models signalling net Dollar demand. Sterling’s dramatic turnaround from flavour of the month to one of the market’s worst enemies continues after the UK economy came to a virtual standstill in Q1 and not all because of the Beast from East, according to the ONS. BoE tightening expectations have been knocked back accordingly, with a May hike now down to circa 20% from evens pre-data and almost baked in at one stage (before misses on the labour, CPI and retail sales fronts last week). Cable is now threatening to lose the 1.3800 handle vs just over 1.4000 at the start of April/Q2 and the 1.4375 post-Brexit vote peak set only recently (on April 17). EUR/JPY/CHF: All reeling and feeling the weight of dovish/downbeat Central Bank policy pronouncements after the ECB acknowledged a slowdown in growth, the BoJ removed its timetable for inflation reaching target and the SNB maintained that the Franc is still highly valued, albeit not has strong as it has been. Eur/Usd has tumbled further from brief post-meeting peaks around 1.2210 to a low of circa 1.2065 and eyeing a 1.2050 Fib for potential support, while Usd/Jpy is consolidating gains above 109.00, but remains capped just ahead of 109.50 and the 109.65 Fib. Usd/Chf has breached 0.9900, but Eur/Chf is sub-1.2000 on the aforementioned single currency weakness.

In commodities, As we approach week end some profit taking noted in the crude complex, that has been further compounded by FX effects, with not much specific news aside from a fire in a Wisconsin oil refinery that had little effect on the fossil fuel. In the metals scope reports were seen from the EU that conditions being set by the US to extend tariff deadlines were unacceptable, with a slight rise in aluminium seen. Gold currently at almost 5 week lows, with the yellow metal heading for its biggest weekly fall in a month.

What’s the best cure for a mini bond market tantrum? Perhaps to arrange a Mr Draghi press conference. It has certainly been the case in recent months that his pressers have generally been interpreted as dovish and yesterday the bond rally mostly came towards the end of his Q&A. Overall 10y Bunds closed down -4.0bps yesterday and Treasuries (-4.5bps) fell for the first time in eight days. At one stage yesterday the 10yr Bund/Treasury spread returned to 29 year wides of 239.6bp (see graph in the pdf). As recently as late 2012 this ratio was almost zero and last traded flat in February 2012. So quite a divergence in recent years.

As DB’s Mark Wall discussed, there was a contrast between a virtually unchanged prepared press statement in which the Governing Council kept its faith in growth and inflation and the Draghi Q&A where there was a clearer sense of caution. The most important point Mark and his team took from the press conference was the fact that the Governing Council had not discussed monetary policy. Instead the Council focused on the “very important” current data. The underlying air of caution coupled with the absence of any preparation for an imminent and important policy decision means the probability of the QE announcement coming in June has declined. DB now see July as the most likely timing of the announcement that net asset purchases will cease. The forecast for the sequencing and timing of monetary withdrawal remain the same with QE ending in December 2018 after a taper in Q4 and the first 20bp deposit rate hike in June 2019.

For credit investors, Mr Draghi played down concerns about a CSPP taper, saying that there is no specific strategy behind the slowdown while also partly blaming it on seasonality. A reminder that Michal in my team wrote a note on this sharp slowdown earlier this week suggesting there was enough evidence that buying was slowing. We’ll perhaps be able to tell more on Monday when the latest numbers are released.

Post the ECB, the Euro finished -0.48% lower versus the Greenback with that move aiding European equity markets with the Stoxx 600 closing +0.94%. US equity markets also bounced back strongly following solid corporate results from the tech sector, with Facebook and AMD up 9.1% and 13.7% respectively. The Nasdaq (+1.64%) rose for the first time in six days while the S&P (+1.04%) and Dow (+0.99%) also advanced. After the bell, the strength in tech seems to be continuing with Amazon up c7% while Baidu and Intel are both up c6% following their quarterly results.

This morning in Asia, markets are trading modestly higher with the Nikkei (+0.42%), Kospi (+0.64%) and Hang Seng (+0.10%) all up, while the Shanghai Comp. is down -0.74%. Datawise, Japan’s April core Tokyo CPI was below market at 0.6% yoy (vs. 0.8% expected). March IP was above expectations at 2.2% yoy (vs. 2%), the jobless rate was in line at 2.5% while retail trade was below market (1% yoy vs. 1.5% expected). Elsewhere, China's March industrial profits grew 3.1% yoy (vs. 10.8% previous).

With the ECB out of the way, this morning we had the BoJ meeting where members voted 8-1 to keep rates unchanged while Mr Kataoka continued to cast a dissent vote. Notably, the BOJ has removed previous wording on reaching its 2% inflation target around fiscal 2019, while it kept its 2019 & 2020 inflation forecasts of 1.8% unchanged. We shall hopefully get more info on this at Governor Kuroda's press conference just after we go to print this morning at 7:30am London time.

Over in Asia this morning, Kim Jong Un became the first North Korean Leader to set foot in South Korea since the 1950’s Korean war as he met with South Korea’s President Moon Jae-in for meetings. Kim said he “felt a flood of emotion” and called for “a new history of peace and prosperity” while indicating to Moon “let’s meet often”. Looking ahead, Kim is expected to meet with President Trump sometime in May or June for talks.

Looking ahead to today, the big focus for the market this afternoon is likely to be a first look at Q1 GDP in the US. The consensus is for a +2.0% annualized qoq reading while our US economists expect +2.2%. Our colleagues have previously noted that their index of key economic indicators continues to point to 3% plus growth so even if today’s Q1 disappoints they doubt that policymakers will rethink the near term trajectory for interest rates. They also highlight that the initial Q1 GDP print has missed the median consensus expectation in each of the last eight years—partly due to well-known issues with residual seasonality. On average, forecasters have overestimated Q1 growth by 46 basis points (bps). This has been even more acute over the last five years as the median forecast has missed by 64 bps. This release has also been prone to substantial revision. Real GDP growth has been revised up in four of the last five years and in five of the last eight years.

The average upward revision has been 88 bps while the average of the three downward revisions over this period (2010, 2011 and 2014) was 193 bps. So as DB’s Brett Ryan suggested, policymakers and market participants are likely to substantially discount the advance GDP figures in the first quarter, at least until the BEA issues its benchmark revision in July.

Also out today will be the Q1 employment cost index which our US economists forecast to come in at +0.8% (consensus at +0.7%). An upside surprise to our economists forecast would boost the year over year growth rate of the ECI above its Q4 2017 post recession high of 2.7% and could cause the market to price a greater probability of an additional fourth rate hike this year (which is our house forecast). According to Bloomberg the odds of this is at 41%, but notably up from the lows of 18% earlier this month.

Moving onto trade, ahead of the next week’s visit to China to discuss trade relations, President Trump’s economic adviser Mr Kudlow told CNBC that “it’s going to cover a broad area. All of the disputes will be discussed”. He added that “I’ve high hopes for this (trip)”, although also noted that “I’m always the optimist about this”. On the other side, Bloomberg has cited unnamed sources which suggest China’s State Council is considering plans to cut the import duty on passenger cars by half, from 25% currently to 10% or 15%. The potential cut is consistent with President Xi’s comments in the Boao forum where he indicated a commitment to cut import tariffs on cars.

Over in Italy, the Five Star Party Leader Luigi Di Maio said “we’re available to sit at the table to negotiate a contract” to form the next government, potentially with the Democratic Party, but “if we don’t succeed, we go back and vote” in a new election.

Moving along, yesterday’s data in the US was a bit of a mixed bag. The April Kansas City Fed manufacturing index was above market at 26 (vs. 17 expected). In the details, the new orders index jumped to a 15-year high of +37 while the production index rose 13pts to a 7-year high of +33. The weekly initial jobless claims fell to a 49 year low (209k vs. 230k expected) while continuing claims was also lower than expectations (1,837k vs. 1,850k expected), although this was partly due to post Easter data distortions. Elsewhere, the March advance goods trade deficit narrowed to a six month low of -$68bln (vs. -$75bln), as exports of goods rose 2.5% mom while imports fell 2.1% mom. Finally, the March core durable goods orders (0% mom vs. 0.5% expected), core capital goods orders (-0.1% mom vs. 0.5% expected) and wholesale inventories (0.5% mom vs. 0.7% expected) were all weaker than expected.

In Europe, Germany’s May GfK consumer confidence index was in line at 10.8, with households less optimistic about the economic outlook but still positive about their willingness to spend. In the UK, the April CBI retailing reported sales index improved 6pts mom to -2 (vs. -3 expected), while the Distributive trade survey showed a net 25% of retailers were optimistic of annual sales growth in May.

Looking at the day ahead, in Europe we'll get flash April CPI reports in France and Spain along with the advance Q1 GDP reading in the former. Germany's unemployment rate for April is also out along with the advance Q1 GDP report for the UK and April confidence indicators for the Euro area. In the US, we’ll see the first release of Q1 GDP along with the Q1 employment cost index and final April University of Michigan consumer sentiment report. Elsewhere, BOE’s Carney and Haldane will speak while Exxon Mobil and Chevron are due to report earnings.